For the vast majority of people, the prospect of having a million pounds to invest is a very slim one. But how many of us have dreamt about what we might do if we had that kind of money.
Whether it’s an inheritance, a prize or lottery win, a Premium Bonds jackpot, the sale of a business or some other form of windfall, working out what to do with that kind of money is a nice problem to have. But there’s also a lot to think about when deciding what to do with such a life-changing amount of money.
And it’s easy to get it wrong. The history of lottery winners is littered with examples of people who have struggled to cope with the impact of their windfall, not just financially but mentally and emotionally too. While our dreams likely include once-in-a-lifetime trips and purchases, we’d also want to invest at least some of our £1m pot. So, what would you need to think about?
Priorities and small steps
If you’re lucky enough to come into £1m, take a deep breath and resist the urge to make any hasty decisions about the money. It might take many months for the excitement, emotion and adrenaline rush to disappear, and it’s best to leave big money decisions until you’re in a calm, rational state to make them.
In the early months, there’s no harm in having some fun with a windfall but set an upper limit on ‘fun spending’, say 5-10% of the total sum. Then clear any debts you have (including your mortgage) and – unlikely as it is that you’ll need it – make sure you have an emergency fund of at least six months’ worth of outgoings, ideally in an easy-access account.
While you decide what to do with the money you’ll want to ensure it’s not losing value to inflation. Put at least some of it in high interest savings accounts, making sure to spread the money across different institutions. This is because the deposit protection run by the Financial Services Compensation Scheme (FSCS) has a maximum limit per banking institution of £85,000 per person or £170,000 for joint accounts.
For many years, the ultimate safe haven for savers’ money has been NS&I (National Savings and Investments), which offers Premium Bonds and a range of other savings and investments. NS&I is different from your normal bank or building society because it’s the government’s savings bank and, backed by HM Treasury, comes with a 100% safety guarantee for your money.
Work out your objectives
When the dust has settled you can think more clearly about how best to use the money, including what you want to spend it on and how you want to invest it. A lot of this will be dictated by your age and circumstances. If you’re mid-career, early retirement and/or setting up your own enterprise might be an option, for example. The priorities will be different if you’re already retired.
Similarly, some decisions will be dictated by how many dependents and family members you have and the extent to which you want to ensure any children or grandchildren are set up for life. Working out what you want to achieve with your windfall really is the place to start when it comes to making the bigger decisions, such as how and where to invest.
Invest in advice – and don’t rely on social media
Once you have your money safely earning decent levels of savings interest, you can sit back and make a long-term plan for the future. If you’re a fan of using social media to source information, be very careful which accounts you trust. Our articles on social media scams and finfluencers explains more.
This is a good time to find an independent financial adviser, which you can do through websites such as Vouchedfor and Unbiased. Take time to find an adviser you feel comfortable with and who you can trust to make the big decisions with you. Our questions to ask an adviser will help. You can check on the FCA’s Financial Services Register to make sure that a firm or individual is authorised to sell you financial products or give you financial advice.
DIY investing
Of course, you could invest the money by yourself. Certainly, the responsibility of such a large sum means now is the time to educate yourself about investing and think about financial goals, even if you decide to use the services of a professional financial adviser. Most investment platforms and fund supermarkets offer a range of tools to help you build, manage and easily keep track of your investment portfolio.
Here’s what you need to think about if you’re investing some of your own £1m:
Stick to the fundamentals
This is a huge amount of money, but it should still be divided by the principles of asset allocation, dividing it at least between the two major asset classes of equities and bonds. You may also want property and gold in there too. Be careful to diversify within asset classes too, for example, global diversification for equities, not just UK-listed shares. Our tips on building a robust portfolio will help.
Investing doesn’t need to be too complicated though. Even a large sum can be invested relatively simply, by using low-cost multi-asset funds such as Vanguard’s LifeStrategy range. Though with a vast sum, you might want to choose a few different providers.
To use the sum to generate a sustainable income for life from the winnings, you can use the 4% rule. In the first year you withdraw up to 4% of your portfolio’s value. In subsequent years you adjust this amount by the rate of inflation. If you’re feeling more cautious, perhaps worried about your investments not performing, start with a 3% withdrawal.
Invest tax-efficiently
Try to get as much money as possible into a tax-efficient environment, where you don’t pay tax on the growth and income from your investments. However, the problem with investing such a vast sum is that you can’t easily channel it into tax-efficient wrappers such as Individual Savings Accounts (ISAs) and Self-Invested Personal Pensions (Sipps).
The annual ISA limit is £20,000, though couples have both allowances to work with. If you have children or grandchildren you could use the Junior ISA limit of £9,000 per child per year. Other tax efficient investment wrappers include Venture Capital Trusts, Enterprise Investment Schemes and offshore bonds. But to use these, you’ll want the help of a professional adviser as they involve more complexity and greater risk.
Boost your pension
A large sum is a great chance to pad out your pension pot. There’s no max on the amount you can pay into your pension and the tax will be the same as it is on a normal regular contribution. Most basic rate taxpayers get a 20% tax top up on their contributions, while higher rate taxpayers get 40% tax relief and additional rate taxpayers an extra 5% on top of that (the income tax thresholds are different if you live in Scotland).
However, there’s also a limit on the amount of pension contributions on which you can earn tax relief – this is the annual allowance, which currently stands at £60,000. The good news is that you can backdate unused allowances up to three years, which means you can carry forward three years of unused allowance to boost the amount of tax relief you get in a tax year.
Find the right platforms
If you’re investing the money by yourself you’ll be doing so through investment platforms. With large sums of money, it pays to look closely at charges, as some keep costs down for bigger portfolios. Similarly, some platforms (most notably interactive investor) charge a flat fee for running your money, which can work well for large portfolios, but most charge a percentage of the amount you invest. Our article on getting the best out of platforms will stand you in good stead, while our free investment platform comparison tool will help you identify the best platform for you.
With such a large sum of money you might want to use more than one platform, as FSCS limits are £85,000 apply to platforms too. You shouldn’t need the FSCS because if your broker goes bust you still own all your shares, funds and other investments on the platform. This is because customers’ assets are ringfenced and held separately in a nominee account – they are legally separate from the platform’s assets and liabilities. But there’s no harm in having an extra layer of protection.
Invest in yourself
Finally, some sensible advice is to invest in yourself. Use some of the money to work towards your personal growth and well-being, by learning a new skill, or nurturing your physical health. Sudden wealth comes with great responsibility and can be stressful, with extra pressure on relationships too (see our article on how to talk to your partner about money), so don’t be afraid to seek help regarding the mental pressures too.
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